Many are asking whether the UK should be brave enough to seize the opportunity to create a huge cryptocurrency market.
Cryptocurrency is a dangerous, unregulated, threat to financial stability and consumes enough energy to cause a hole in the ozone layer. Led by the French, the cryptocurrency plans to stifle the nascent cryptocurrency market by strangling it with rules and regulations. Like many other new technologies, it will be destroyed by the authorities before it has a chance to take root.
But the EU’s loss could be Britain’s gain. As the rest of the continent becomes increasingly regulated, London could become a major hub for digital currency trading. We need to create a recognized legal framework for currencies; we need to create exchanges with depth and influence; and we need to use the influence of the Bank of England to create a robust market. This is a big prize, and the EU will give it to us, but the UK must be brave enough to seize the opportunity.
There are many ways to measure the cryptocurrency market. You can look at the total value of the major forms of digital currency, from Bitcoin to Tether to Ethereum. In April this year, this amount exceeded $2 trillion (£1.45 trillion) for the first time. Note the number of different coins, which now stands at around 6,000 (which, to be honest, seems too high to say the least), whereas ten years ago there were only a handful. One can also look at the number of daily transactions, which exceeded 1 million in the case of Ethereum in February this year. Whichever way you look at it, one point is clear. This is an important and growing part of the global financial markets.
Perhaps not too surprisingly, the EU has just decided that commodities of this size cannot be traded without officials looking after them. This week, France proposed that this fledgling sector be regulated centrally by the EU, with powers delegated to the Paris-based European Securities and Markets Authority rather than national regulators. This will almost certainly happen. Brussels officials, interestingly, always agree with any proposal that makes the EU more influential. Cryptocurrencies will soon be regulated from Paris.
Whether this is really necessary is debatable. There are still many scare stories about the use of cryptocurrencies by gangsters and terrorists without much evidence. Indeed, it is understandable that most criminals still prefer cash, and if the EU really wanted to fight money laundering, it would not have liked to allow the €500 (£428) bill that was in circulation from 2002 to 2019 (its only purpose seems to have been to make drug dealers’ suitcases a little lighter: no one ever used the €500 bill to pay for a cab).
Of course, some companies need to be watched, such as the recent prosecution of cryptocurrency exchange Binance by the Financial Services Authority. Cryptocurrencies are still the Wild West of currency markets, and many scammers and fraudsters flock to this market. However, this does not mean that the entire sector should be centrally managed. When the EU decides to “regulate” something, it almost always means it wants to abolish it. We have seen this with countless new technologies, from search engines to information sharing to finance, which is a big reason why the European technology industry is still a backwater compared to the U.S. or China.
But it could also be a great opportunity for Britain. Now that we have left the EU and abandoned any form of equivalence in financial regulation, we should be brave enough to seize this opportunity. There is an opportunity to create a huge cryptocurrency market in London. There is already a thriving cryptocurrency industry here – LMAX, for example, has just become a billion dollar business thanks to its cryptocurrency exchange. But the UK needs to get three things right.
First, the UK needs to create a legal framework for cryptocurrencies. In the U.S., Wyoming has pushed cryptocurrency legislation at the state level and created a booming industry, but for all its charms, most companies would rather be in London than Cheyenne. In Switzerland, cantons such as Zug, known as the valley of cryptocurrencies, have started allowing tax payments in digital currencies. But they are all relatively small centers.
The UK has one of the best and most robust commercial legal systems in the world. If cryptocurrencies had legal status here, the market would quickly move to London. Most people prefer to settle their disputes elsewhere.
Second, London must create a set of secure exchanges for cryptocurrencies. There must be markets for each of the major currency units, with sufficient liquidity to make any kind of exchange, anywhere in the world. Finally, we need to use the influence of the Bank of England. The Bank remains one of the most reliable and stable financial regulators in the world. If it manages markets with a light hand and leaves room for new ideas, it will help the UK become a major center of innovation and trade.
Cryptocurrencies have the potential to become a huge financial market. Of course, they are unstable and will remain so. And, of course, there will be fraudsters. In general, they exist in any market that grows at lightning speed. But they are no longer a flash in the pan. The market has been around for over a decade, has gone through three bull and bear cycles and has come back stronger each time.
It is fortunate that the EU seems to want to break up its market. London should seize this opportunity. If it can become the world’s leading cryptocurrency hub, it could play a major role in creating a successful post-Brexit city.
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